Polaris Industries Inc.
/ (PII-NYSE) / $44.79*Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 4Q09 and FY09 Earnings Update
Prev. Ed.: December 10, 2009; Minor Changes
Brokers’ Recommendations: Neutral: 50.0% (4 firms); Positive: 50.0% (4); Negative: 0.0% (0) Prev. Ed.: 6; 3; 0
Brokers’ Target Price: $54.20 (↑ $0.87 from the last report; 5 firms) Brokers’ Avg. Expected Return: 21.0%
*Note: Though dated February 3, 2010, share price and brokers’ materials are as of February 2, 2010.
Note: A flash update on 4Q09 and FY09 earnings result (1/28/10)
Note: The tables below for Revenue, Margins, and Earnings per Share contain fewer brokers’ materials than the brokers’ materials used in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Polaris Industries, Inc. (PII) is a leading designer and manufacturer of all terrain vehicles (ATVs), snowmobiles, and motorcycles. The company has the No. 1 and No. 2 share of the Off Road Vehicles (ORV) and snowmobile markets, and is developing a motorcycle franchise.
Of the eight analysts covering the stock, four assigned neutral ratings and four rendered a positive rating. The analysts’ opinions are as follows:
Neutral or equivalent outlook (4/8 firms or 50.0%) – Target price is provided by one firm i.e. $45.00. The analysts with a neutral stance believe that over the long term, Polaris can achieve meaningful success with its new products driving up revenue and EPS growth, and manufacturing efficiencies boosting margins, however, over the intermediate term, a sluggish macroenvironment could negatively impact consumer discretionary spending, and ultimately limit the stock price’s expansion from the current level. Thus, based on the weakening fundamentals and uncertain credit environment, these analysts remain cautious toward consumer durable stocks. They also believe that the stock may suffer from some near-term uncertainty. The analyst based its valuation on P/E multiple or EV/EBITDA multiples.
Positive or equivalent outlook (4/8 firms or 50.0%) – These analysts provided a target price range from $53.00-$58.00. The analyst views the near-term fundamental trends to be difficult due to the overall macro economic environment and consumer weakness. However, the analyst continues to be positive on the PII brand, its management team, and long-term free cash flow. The analyst believes Polaris has done a good job of reducing its dealer and factory inventory and should be in a position to weather a downturn and show growth and operating leverage in the future. These analysts based their valuation on P/E multiple or EV/EBITDA multiples.
February 2, 2010
Recent Events
On February 3, 2010, PII announced its acquisition of swissauto Powersports. Based in Burgdorf, Switzerland, swissauto has expertise in designing and developing high-performance and high-efficiency engines and innovative vehicles. The acquisition will further strengthen Polaris’ global engine and vehicle design capability while also enhancing the company’s European presence.
On January 28, 2010, Polaris Industries Inc. announced its 4Q09 and FY09 financial results. Highlights are as follows:
· Net revenues decreased to $471.7 million and $1,565.9 million in 4Q09 and FY09 respectively from $523.6 million and $1,948.3 million in 4Q08 and FY08 respectively.
· Net income was $43.9 million or $1.31 per diluted share in 4Q09 versus $36.2 million or $1.13 per diluted share in 4Q08. In FY09, Net income was $101.0 million or $3.05 per diluted share versus $117.4 million or $3.50 per diluted share in FY08.
Overview
Brokerage firms identified the following investment merits and drawbacks of PII:
Key Positive Arguments / Key Negative ArgumentsMarket Leader: Polaris is No. 1 in ORVs (includes both ATVs and Utility Vehicles), No. 2 in snowmobiles, and has a large opportunity in the motorcycle market. / Increasing Competition: Polaris competes with world-class companies in each business segment.
MVP program. Polaris has expanded its new dealer order and selling program to 50% of North American dealers. / Consumer Spending: Consumer spending to remain weak throughout 2010, which will limit sales growth in both the U.S. and Europe.
New Product Innovations: PII has a strong pipeline of new products that will likely boost both its topline as well as its bottomline in the long term. / Decline in PII’s Business: There are jaded growth prospects in key business segments like the core North America ATV market and snowmobiles.
Diversified Product Portfolio: PII’s exposure to different end markets provides a stable revenue stream and establishes a platform for growth in new markets. / Currency: Unfavorable exchange rates could negatively impact revenue from the international markets.
Flexible manufacturing: PII has interchangeable manufacturing lines, which allow it to adjust the production mix of ATVs, snowmobiles, and motorcycles to match demand trends while maintaining higher employee and asset utilization rates. / Regulatory Issues: Polaris is subject to certain federal regulatory issues related to land access (i.e. national parks) and emission standards.
International Growth: Polaris enhanced its European distribution, establishing a foothold to support its future growth initiatives. The ATV market in Europe is approximately 20%-25% the size of the US market. / Credit Market Issues: The credit market issues could negatively impact consumer credit availability, as well as, the purchase of Polaris’s products.
Based in Minnesota, Polaris Industries, Inc. (PII) is engaged in the designing, engineering, manufacturing, and marketing of motorized products for recreation, as well as, for utility, including all terrain vehicles (ATV), snowmobiles, Ranger utility vehicles and Victory motorcycles, together with related replacement parts, garments, and accessories. The company also markets a line of recreational apparel, including helmets, jackets, bibs and pants, and hats for its snowmobile, ATV, and motorcycle lines. It sells its products through a network of 2,000 dealers in North America, and 5 subsidiaries and 40 distributors in 126 countries. The company also provides purchase-related financing to retail consumers and dealers through its 50% equity interests in Household Finance and Polaris Acceptance. The company’s website is http://www.polarisindustries.com.
Note: The company’s fiscal year coincides with the calendar year.
February 2, 2010
Revenue
According to the company, sales decreased to $471.8 million and $1,565.9 million in 4Q09 and FY09 respectively from $523.6 million and $1,948.3 million in 4Q08 and FY08 respectively. The upside in revenue resulted from better than expected Off-Road Vehicle and PG&A sales. The company’s reports were in line with the Zacks Digest average figures.
International revenue was up 18% y/y in 4Q09, including a 21% increase in ORV sales internationally driven by a weak dollar and positive product mix.
Segment Revenue
Off Road Vehicles (ORV)
As per the company’s report, Off-Road Vehicle (ORV) sales in 4Q09 and FY09, which included both core all-terrain vehicles (ATVs) and Ranger side-by-side vehicles, decreased 12% y/y and 22% y/y to $282.8 million and $1,021.1million respectively. The company’s reports were in line with the Zacks Digest average figures. The decrease in 4Q09 results was due to the weakening consumer retail environment in North America as dealers continued to reduce core ATV orders in an effort to further reduce dealer inventory levels. As a result, core ATV dealer inventory levels in North America were 35% lower at the end of 4Q09 than at the end of 4Q08. North American retail sales for ORVs increased in the single digits percentage range for 4Q09 with side-by-side retail sales increasing in the mid-teens and core ATV retail sales decreasing in the mid-single digit range for the quarter. The improvement in the retail sales trends is an indication of the acceptance in the marketplace of the company’s new product introductions in the recent years.
International ORV sales increased 21% y/y in 4Q09, primarily due to the weak US dollar and positive mix benefit as higher priced side-by-side vehicles were shipped during 4Q09 compared with 4Q08.
For FY10, management expects ORV sales to be flat to up slightly with North America industry retail sales down 10%-15%. Management expects to outperform the industry at retail due to new products, military, and international expansion.
Analysts, in general, note that PII and all its competitors are facing challenges in core ATVs (non-utility vehicles), in the form of high gas prices, a difficult lending environment, poor consumer sentiment, and a deteriorating macroeconomic environment. However, they estimate that core ATVs remain an important market segment and note that Polaris plans to regain share and revitalize the category by offering higher-quality products, driving product innovation, improving speed to market, aggressively helping dealers manage inventory, and exploiting international opportunities.
Snowmobiles
As per the company’s report, Snowmobile sales decreased 14% y/y and 13% to $81.4 million and $179.2 million in 4Q09 and FY09 respectively. The decrease reflects the continued weakness in the consumer retail environment. The company’s reports were in line with the Zacks Digest average figures.
For FY10, management expects revenue to be down slightly to up slightly and will have additional insight following the completion of the snow season. Management expects North America snowmobile industry retail sales to fall 10%.
On Road/Victory Motorcycles
As per the company’s report, sales of the On-Road division, which primarily consists of Victory motorcycles, decreased 12% y/y and 44% y/y to $19.1 million and $52.8 million in 4Q09 and FY09 respectively. The decrease in 4Q09 results reflects the continued weak heavyweight cruiser and touring motorcycle industry and the company’s continued planned reduction in shipments of Victory motorcycles to dealers in North America to assist dealers’ efforts to further reduce inventory levels. North American dealer inventory of Victory motorcycles decreased 27% y/y in 4Q09. Victory motorcycles had strong retail sales during 4Q09, increasing in the low 30% range, a reflection of the initial acceptance of the new model year 2010 motorcycles and more focused attention on growing retail sales. The company’s reports were in line with the Zacks Digest average figures.
During 4Q09, Polaris continued to ship its new electric powered low emission vehicle, the Polaris Breeze, to its new neighborhood vehicle dealer channel in master planned communities in the Sunbelt region of the U.S.
For 2010, management expects the segment’s sales to be up over 50%. Management expects heavyweight motorcycle retail sales to decline 10%-15% with Victory gaining market share. Management also expects the North America Low Emission Vehicle market to increase mid-single digits.
Parts, Garments, and Accessories (PG&A)
As per the company’s report, PG&A sales increased 2% y/y to $88.4 million in 4Q09 and decreased 9% y/y to $312.7 million in FY09. The increase in 4Q09 results were due to increased snowmobile and RANGER side by-side related PG&A sales. The company’s reports were in line with the Zacks Digest average figures.
By business segment, 67% of PG&A sales came from off-road vehicles, 20% from snow, 5% from Victory, and 8% from other. By category, 55% of sales came from parts, 41% from accessories, and 4% from apparel.
Management expects PG&A sales to increase at roughly the same rate similar to the overall company’s sales in 2010, or 1-3% as product demand drives parts and accessories sales.
Outlook
The company expects 1Q10 and FY10 sales to o grow modestly, in the range of 1%-3% y/y.
Provided below is a summary of revenue as compiled by Zacks Digest:
Revenue($MM) / 4Q08A / 2008A / 3Q09A / 4Q09A / 2009A / 1Q10E / 2Q10E / 2010E / 2011EOff-Road Vehicles / $319.8 / $1,305.8 / $261.1 / $282.8 / $1,021.1 / $215.2 ↑ / $264.7 / $1,035.6↓ / $1,091.2 ↓
Snowmobiles / $95.2 / $205.3 / $82.2 / $81.4 / $179.2 / $8.0 / $7.0 / $176.5 ↓ / $179.7↓
On-Road / Victory Motorcycles / $21.8 / $93.6 / $9.3 / $19.1 / $52.8 / $20.4 ↑ / $17.2 / $78.5 ↑ / $82.2↑
Parts, Garments & Accessories / $86.8 / $343.6 / $83.5 / $88.4 / $312.7 / $76.5↑ / $68.7 / $322.8↑ / $337.2↓
Total Revenue / $523.6 / $1,948.3 / $436.2 / $471.8 / $1,565.9 / $320.1 ↑ / $357.6 / $1,613.2 ↑ / $1,690.2↓
Digest High / $523.6 / $1,948.3 / $436.2 / $471.8 / $1,565.9 / $322.7 ↑ / $364.3 / $1,621.9↑ / $1,711.7 ↑
Digest Low / $523.6 / $1,948.3 / $436.2 / $471.8 / $1,565.9 / $316.1↑ / $350.4 / $1,608.8↑ / $1,660.4 ↓
Year over Year Growth / -3.3% / 9.5% / -24.8% / -9.9% / -19.6% / 2.6%↑ / 3.4% / 3.0%↓ / 4.8%↓
Sequential Growth / -9.8% / 26.1% / 8.2% / -32.2%↓ / 11.7%
Highlights from the revenue table are as follows:
· For 2010, the range is $1,608.8 million to $1,621.9 million, with an average of $1,613.2 million (↑ from the previous estimate of $1,597.1 million).
· For 2011, the range is $1,660.4 million to $1,711.7 million, with an average of $1,690.2 million (↓ from the previous estimate of $1,613.2 million).
Following is a graphical representation of segmental revenue:
Please refer to the Zacks Research Digest spreadsheet of PII for specific revenue estimates.
Margins
As per the company, gross profit increased to $128.6 million in 4Q09 from $119.3 million in 4Q08. Gross margin was 27.3% in 4Q09, up 450 bps y/y (in line with Zacks Digest Average). The increase in the gross margin resulted primarily from continued product cost reduction efforts, lower commodity costs, higher selling prices and favorable currency movements, partially offset by increase in warranty expense. According to the Zacks Digest average, gross profit was $128.6 million, up 22.6% y/y.
In FY09, gross profit decreased to $393.2 million in FY09 from $445.7 million in FY08. However, gross margin increased by 220 bps y/y to 25.1% in excess of 130 bps improvement that management expected after it laid out its initial 2009 guidance in January 2009. The y/y improvement was due to favorable currency movements, strict cost management and operational manufacturing excellence initiatives (quick factory adjustments/turnaround, productivity, upfront value engineering). The company results were in line with Zacks Digest average.